What is a freemium model?
A freemium business model is a product growth strategy in which a company offers a basic version of its product for free and charges a premium for more advanced features. This type of business model isn’t new, but it’s become more popular as software companies and apps have adopted it in recent years.
The idea behind the freemium model is that businesses can let customers try the most basic features of their product and start building relationships with them in the hopes they’ll eventually convert into paying customers.
The freemium strategy model aims to decrease the customer acquisition cost by offering basic features for free, ultimately giving users a lower bar to entry to learn more about the features of a product and determine if they want to pay for better ones.
Overall, freemium business models can lower marketing costs when implemented correctly. But, they can also affect sales because users might wonder why they should pay for premium features when they’re already getting the basic features for free.
In its most basic form, the freemium model nurtures leads to increase recurring revenue without businesses necessarily having to engage those leads. Once a freemium user sees the value of a product, they’re more likely to invest in a premium account, which means lower marketing costs and higher sales.
Examples of freemium models
With a freemium model, users can try a software, app, or mobile game, knowing there’s an option to upgrade to premium features. A few freemium model examples include the following:
- Mobile games: If you’ve ever downloaded a mobile game for free, you may have realized that they have a ton of ads, which can impact the user experience. However, with a freemium business model, a game development company can offer a premium ad-free version.
- Spotify: Spotify is a music streaming app that works in the same way as many mobile games. With the free version, you get access to music from various artists. However, with Spotify Premium, you can access ad-free music and exclusive artist releases.
- Trello: If you need a task management solution, Trello is one of the easiest to use. You can use the free version of Trello as a to-do list with unlimited tabs and boards. But you have to pay extra if you want to integrate Trello with other apps. This freemium model introduces users to Trello and shows them how it works. Then, when users realize they can improve their productivity even more by connecting the tool to other apps, they’ll pay more.
Pros and cons of freemium models
The freemium pricing model doesn’t work for all businesses. To try a freemium model, you’ll need a digital product with basic and premium features.
If you have a product that works nicely with the freemium model, you can use it for product pricing and lead nurturing to increase your revenue. Like all business models, the freemium model has its pros and cons.
Advantages of freemium
With the freemium model, businesses can acquire new users by offering a basic version of their product for free. This allows them to collect more data on their users to find better ways to market to them and improve their premium features.
With collected customer data, you can create more personalized marketing campaigns and build personalized products for the exact types of users you want to convert into paying customers.
Additionally, companies can increase their revenue by allowing ads on their platforms. For instance, a game developer can offer a free game with ads, collecting revenue from advertisers. Then, when users decide they no longer want the ads, the business collects revenue directly from the user.
Some of the best freemium models begin as startups to create brand awareness without the need for customer support or high costs to acquire new customers. They’re a great option for small or large businesses because they have a low bar to entry for the customer, which reduces overall marketing spend.
Disadvantages of freemium
With the freemium model, some free users may never convert to paid users. For instance, some Spotify users are okay with dealing with ads because it means getting free music. On the other hand, some consumers are willing to compromise on what they want to save money, so you can’t expect every customer to pay for premium features.
Additionally, many companies make the mistake of giving free users too many features upfront. Giving them access to great features can help them convert, but if you give them too much for free, they may not feel the need to upgrade.
On the other hand, you shouldn’t make the mistake of offering too little for free. Customers may look for another solution if your free version doesn’t provide enough value or demonstrate its features.
Difference between freemium and free trial
Freemium and free trial models seem like they’d be the same since they offer customers free products. But, free trials are time-bound. A user can sign up for a free trial lasting anywhere from a week to a month or more, depending on your business model.
Then, when the free trial period ends, the user can no longer access the premium or advanced version of the product until they pay for it.
Conversely, freemium models allow users to access some product or application features forever. Free trials give users complete access to all the bells and whistles, but only for a short period.
Both come with lower acquisition costs and an easier path to convert users into paying customers. However, you may combine both models.
For instance, you can have a free forever option with limited features and a premium version. Then, you can allow your customers to sign up for a free trial to determine whether they want to spend money on the premium version.
This gives them access to everything. Once their free trial ends, you can ask them if they’d like to keep using the premium version or downgrade to the free version.
Since many users have started with the free trial that gives them all the premium features, they can experiment with everything. It may no longer be an option for them to switch to a basic version because they already use all the premium features.